Groupon doesn't have the money to pay you
July 8th, 2011 • Posted by Bill Bice • Permalink
Groupon's filing to go public has opened up the way their business works for everyone to see. And a lot of people have been looking. The most shocking thing? If Groupon's IPO doesn't work as planned, they don't even have the money to pay merchants that have already run Groupons:
[Groupon is] operating like a Ponzi scheme that needs constant infusions of cash to stay afloat as it's hemorrhaging money.
What does that mean? They have $208 million in cash, but owe merchants $290 million.
Meanwhile, as the Wall Street Journal writes, Groupon increasingly has a competitive problem, because bargain hunters are willing to hunt anywhere:
"If you offer a good enough deal, it doesn't matter who you are," says Ms. Clarkson, a Web developer and bartender, of the deal sites.
Wow… that is shocking!
Groupon has contacted our salon at least 3 times wanting to do business. I don't like that for 25% of the regular price (half off to the customer and Groupon receives half of the customer payment) you will receive a cart load of people to your door. My concern is more about the TYPE of individuals Groupon brings in — bargain hunters — who may very well not have the funds to visit us again in the future! I DO offer bargains and specials and freebies to our guests but my focus is different! With Groupon, I can have my staff provide stellar service only to find out more often than not, the bargain hunter won't be back, our prices are too high for them on a regular basis, as much as they loved it!
Has anyone found a way to make Groupon work well by bringing repeat business or having them actually purchase more when they DO use their Groupon?
At some point health, beauty and wellness practitioners will come out from underneath the ether and realize that Daily Deal sites are a race to the bottom. They are systematically debasing the pricing norms of millions of personal service practitioners. They drop in, slash your prices to the bone, massively disrupt your existing clientele, then they take half your money, and the bargain hunters never come back. Other than that it's great.
Daily deal sites are parasites in constant search of new hosts. Here is a white paper we wrote that tells it like it is.
I hesitated for a very long time to test run the Groupon-style of marketing due to the constant negative press on spa web boards. So I decided to finally run a LivingSocial deal as a way to give two new employees a new client base to build from. We sold over 600 GCs and have been paid close to $9000. I have my staff go on hourly pay when they perform services on these voucher clients and they realize they need to upsell and rebook. They have a system to track the percentage of clients who are returning. We were hoping to at least keep about 20 percent of them, we are actually finding so far that 75 percent of them are returning. We have only had about 15 percent of the clients use the coupons so far. The deal gave me the additional revenue to purchase two beautiful new pedicure chairs and we are actually selling products to these people, getting referrals, etc. I actually need to add a new employee since we have been so so very busy. In the past I have spent close to $1500 on high end display ads, etc. And would gain under 10 clients as a result. If you are providing a really special experience to these clients and connect with them as you would with any other client it can work. I think that different deal sites might draw different types of clients. We have seen some clients that we know are just spa hopper types, but we have reached hospital administrative staff and professionals as well. I think once or twice a year to supplement our marketing will be a great tool for us. I do not plan to ever go with Groupon though due to the continued negative press I have been reading.
Randy, you are right on the money. Diane, if you aren't worried about what Randy said, then one way to make it work (better) is combine a small service with really normally high priced product (assuming you can cover the margin loss on the product). Then you MIGHT be able to offer what Groupon requires (a smoking hot deal) and give them their cut (which by the way they will negotiate — it isn't always 50% so maybe you could get them down to 30%. That said, unless you are really big and either just starting out or about to fold for lack of cash flow, I would not do it. There are far better ways to get and keep clients with out giving away the farm and devaluing your brand. Good Luck!
P.S. Just try to hang in there until these parasites have run their course and fold. It happened in the 80′s and it will happen again.
I ran a Groupon for my small spa and am sorry I did! We rebooked at a 20% rate, but only 5% kept their appointments. After that, we got pre-payment and have kept about a 5% rebook/return rate. We usually have about 20% or more, and did not short these clients whatsoever. They were simply not likely to rebook no matter how wonderful it was. We had a rebooking campaign at a discount, up-sold about 50% of them on additional services (very low-key), and we still lost money. The problem seemed to be that the vast majority of the clients coming in either felt they could not afford regular massage, or they were from out of town (!!!) so certainly had no plans to come back. The majority were sold to people who live a fair distance away, and we are simply not convenient to them. So while Groupon considered our campaign highly effective and have been calling me since to do it again (not likely, stop calling!), it just about sunk us in the increased cost of administration, supplies, upkeep, and turning away full paying clients. In the end, we might come out even, since about 30% are still not redeemed and we have less than 2 months to go out of a year. We only got about 3 regulars out of 500 redeemed so far. Talk about advertising to the wrong clientele! It was NOT worth the stress, the difficult clients, and the frustration. If I were to do it all over again (If a gun was pointed at my head), I would insist on a lower commission to Groupon (they gave us 20 out of 35, with no credit card fees. Now they are trying to talk me into only a 20% commission to them, so it is very negotiable), a lower cap at the number (capped at 500, instead of 1,000), and an explicit exclusion of out of towners (I never considered that!) so that only people in our county or city proper could purchase. Upon rebooking, I would immediately require a credit card to reserve. I negotiated a smaller pay amount to our therapists, but I would reduce it still further (I lost 2 therapists on this even though every one of them agreed to it happily ahead of time). But I wouldn't do it again unless my life depended on it. I would rather close and walk away than go through this again. Also of note, many area spas ran similar deals, and now we seem to get a lot more price shoppers on the phone. It detracts from the perceived value of massage, and many just won't pay full price any more. They wait for the next Groupon or similar coupon to the next spa. There is no loyalty, even from those who love us! I am looking forward to this experience being over.
Though Groupon takes only 30% of what your take… from the 50% you have to cut the price of your service down too. I don't like the idea that they can sell up to 1000 of these deals and in most cases, only 350 will remember to use the deal, what happens to the rest? Groupon keeps it. They made the money off your name. They use the excuse of law when asked, "Can we have that customer's email address so that you can remind them to use it?" It's the least the company can do given that it's you that helped keep their business running.
Doing group deals like this isn't for everyone and if it's done as a desperate measure, many business have resentment towards it and have crappy impressions because of it. I think its perfect for those who are just starting out, but know what you can handle. Many massage therapist have quit because they didn't make space for regular paying clients and only dealt with group deal clients.
The kind of clientele you will get from this is non-returning clients, because they aren't interested in you, they just want what the next best deal. I did one with Urban Dealight after 14 years in business. A drunk driver injured me and after 6 months of rehab and 8 months of not being able to go back to work, I took up Urban Dealight with such regret. But I got to cap the deals at 300 and surprisingly for San Antonio, they tipped well. But out of those 300 I only got 50 returned customers.
Like I said early this is not the result for everyone. Not that many businesses have a story like this either.
Marketing 101
Accounting 101
Human Resources 101
Need I say more?!?
I'm curious as to why SpaBoom continually tries to discredit Groupon? SpaBoom has had numerous webinars and blog articles casting a negative shadow over Groupon. Why? As a web hosting company, SpaBoom isn't affected by Groupon. Whatever options Spa businesses choose to use for advertising is up to them and has no effect on SpaBoom, unless, of course, the spa goes out of business and no longer needs SpaBoom for web hosting, but in my experience that has more to do with how the business is run in general, than simply what advertising sources are used.
As a business owner, I've tried various forms of advertising — newspaper ads, health fairs, trade journals, etc., and Groupon. While all but the Groupon ads cost hundreds of dollars, none of them brought more than 1 or 2 clients, and many of them brought no new clients whatsoever, so were a complete waste of my advertising dollars. However, from one Groupon ad I sold over 400 massages and maintained an average of 10+ % retention — a far greater return on my investment than any of the other advertising sources. The one thing I do think that businesses using Groupon need to remember is how to leverage that clientele. Like Joy states above, you need to keep room on your books for your regular, and regularly priced, clients to get in. If you fill your schedule with Groupon clients, you will go under. And also, depending on the size of your business, cap your sales at an appropriate number so you don't oversell. That's all just basic commons sense for any form of advertising you do, as a business owner. What I don't understand is comments like "out of those 300, I only got 50 returned customers." That's almost 17% — and you consider that LOW? How many customers are you attracting with other forms of advertising, and how many of those are rebooking? I certainly have not experienced those types of numbers from any other advertising I've done. And statistics show that you can't expect more than about 5% ROI from most forms of advertising, so anything over that is successful, and 17% is certainly great ROI.
SpaBoom states that Groupon is devaluing the massage industry. I disagree. Spas offer various incentives, often in the form of discounts, to attract new clients. Groupon is just one more way to offer a discount — albeit a deep discount — but it's a one-time opportunity to purchase a discounted massage. I take more offense to the Massage Envy model, a 'membership' type system which also includes a low cost (discounted) massage which 'members' must pay for whether or not they use it, and therapists receive a very small percentage of the cost charged to the client. I think this model devalues our industry much more than Groupon, as consumers can walk in anytime and get a 'cheap' massage — and only 50 minutes at that — with a therapist who doesn't have time to do a proper intake with the client due to having clients booked every hour on the hour with no time in between, so basically a turn-style system with little or no personal attention to individual clients. Or what about all the Asian "Happy Hour" massage parlors springing up everywhere, which are obviously unlicensed, untrained 'massage therapists' who are doing far more than massage? These also drastically devalue our industry; statistics show that only 20% of the population has ever had massage; the remaining 80% who have never experienced a legitimate (or any) massage are left to question whether all massage is 'that type' of massage, thereby giving us all a bad name.
Why doesn't SpaBoom target these operations in its attempt to clean up the industry's image? I think your energy would be much better spent!
Valerie: Our mission at SpaBoom is to improve the business of our clients. It is certainly possible to use Groupon effectively, but we have found that many of our clients, and small businesses in general, did not get the full scoop from Groupon before they signed up. "You will get $0.23 on the dollar," is not the way the Groupon sales team presents the program.
Part of the value we provide is helping our clients stay current with how new media can impact small businesses. Investors initially loved Groupon because it was a way to harvest ad dollars from small businesses. However, many leaders in the tech press think the the Groupon model is terrible for most small businesses, and is poised for collapse. The investment community agrees.
Part of the concern is that the economics of Groupon will crush a business that is not prepared, and part is that there are now so many deal sites that consumers can get a half price offer almost any day for many services.
Our focus has been to educate our industry, including tips for selling on Groupon. The majority of comments to our blog (including the ones on this post) have agreed with our analysis. If you are getting good results with Groupon and daily deal sites, good for you! However, it is our role as experts in online spa marketing to reveal all we know about the business model. The bottom line is this: Groupon is basically a very expensive list rental system. Strategic use of these types of services may make sense some of the time. However, you will make more money and serve your clients better if you work on building your own lists on Facebook or via email. For a great example, we followed three of our clients who ran very successful promotions using their own lists. The clients you get from Groupon are Groupon's customers, and they will continue to receive offers from your competition. Long term that does not seem like the best way to market, particularly as they have to sell more deals every month just to keep the lights on.